investing with a large amount of cash
By: Shane Weston
September 26th, 2021
Let's say you find yourself with a wad of cash. It could be from your year end bonus or inheritance. Whatever the case, you are interested in investing it. As an investor, you may wonder whether you should slowly spread out your deposits over time or deposit your cash all at once.
Regardless of how the markets are performing, it has been found that you would receive a higher amount in your portfolio if you contributed to it as a lump sum investment instead of using the dollar cost-averaging (DCA) method according to a study by Northwestern Mutual Wealth Management. The study conducted by Northwestern Mutual looked at a rolling 10-year return with $1 million beginning in 1950. The lump sum was deposited right at the start of the year, while the dollar cost-average spread out the million dollars evenly across the first 12 months.
As for the results, a 100% equity portfolio (Aggressive Growth) with the lump sum payment outperformed the DCA method 75% of the time. A portfolio with 60% stocks and 40% bonds (Growth with Income) saw an outperformance rate of 80%. Lastly, a portfolio with 100% fixed income (Income with Capital Preservation) impressively showed a 90% outperformance than the dollar cost-average.
It is important to note that the dollar cost-average is not a bad investing strategy. For example, 401(k) plans are using this exact method with their paycheck contributions throughout the year.
Overall, the 10-year study shows that if investing for the long-term, then the lump sum investment will be the most beneficial between the two options.